Venezuela, Not Russia, Will Be The First Domino To Fall With The Price of Oil

Keith Naughton Public Affairs Consultant
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The oil price collapse has brought about excited speculation that the end may be near for Putin, Iran and the American oil shale industry. While the oil price downturn will definitely stress these three players, the prime candidate for political collapse is Venezuela – with significant ramifications for the United States.

And it’s likely the Obama administration is not prepared at all.

Venezuela has all three factors present for an imminent political implosion: 1) severe and worsening economic distress, 2) an organized political opposition, and 3) disunity in its security services. Russia and Iran may be in tough economic straits, but the political opposition in both countries is weak and the armed forces and police are clearly under the control of the existing regime.

For over 15 years Hugo Chavez and his successor Nicolas Maduro have pursued absurd socialist economic policies liberally mixed with heavy-handed repression, and an anti-American foreign policy. Private property has been expropriated. Political opponents have been harassed and jailed. The crime rate is soared. Essential items have disappeared from store shelves. Maduro himself flat-out stole the last presidential election  (of course the leftist leaders in Latin America just shrugged it off — showing yet again that the left only likes democracy when they win).

Now Venezuela is at the end of its financial rope. Tens of billions of dollars in oil revenue have been wasted away and now that the price of oil has cratered, the country’s fiscal deficit is unsustainable. Maduro is cutting spending, unloading debt at cut-rate prices, and arresting his political opponents. Tension is rising between the armed forces and the Maduro’s Chavista paramilitary thugs.

If there is a place on the planet primed for civil war and collapse, it’s Venezuela. Not that anyone in the mainstream news media or the Obama administration seems to notice.

Such a collapse would be a much bigger deal for the United States than what is happening in Russia or Syria. An economic and humanitarian disaster in Venezuela will have immediate and substantial effects.

What are the possible effects? Here are five:

1. The price of oil goes up: Unrest takes Venezuelan oil off the market. America imported 750,000 barrels of oil per day in 2013. The price of oil would increase more for the United States, since its imports from Venezuela and its refineries are calibrated for Venezuela’s particular type of high-sulfur content crude. (This would be less of a problem is the Keystone XL pipeline were in place, making supply to America more robust)

2. Refugee crisis: Thousands of Venezuelans could flee fighting and shortages for Colombia, Panama, the Netherlands Antilles and Trinidad. Accompanying legitimate refugees would be criminals, drug smugglers, and paramilitary forces. Such a crisis could destabilize Colombia, one of the most impressive economic and social success stories in Latin America – and a staunch American ally. A crisis could boost the terrorist gang who calls itself FARC, which are really a bunch of sociopathic criminals who claim to be revolutionaries.

3. Immigration crisis for the U.S., Part II: Venezuela has been providing cheap oil for nations in the Caribbean and Central American for the past decade. Many poor nations have become dependent on this subsidy. So, what happens in the Caribbean and Central America when economic conditions worsen? They make tracks for the U.S.

4. Cuba intervenes: Cuba is heavily dependent on Venezuela for cheap oil and cash. In exchange, the communist nation has provided health care assistance and, more importantly, stuffed the Venezuelan security services with its own “advisers.” Cuba may not be able to survive without Venezuelan largesse. It is possible that Cuba will send its own armed forces to block the replacement of the Chavistas by a true democracy. Is America prepared to stand by while the Cuban dictatorship colonizes Venezuela?

5. China takes over Citgo: Venezuela owes China a whopping $50 billion. That sum simply cannot be paid. Citgo, the old Cities Service, has been owned by PDVSA, the Venezuelan national oil company since the 1990s. It is one of the few valuable assets the country owns. China could demand Citgo as part of debt re-payment or restructuring. As a political move to stick it to the United States, China might be willing to pay a premium for the oil company. Will Obama and Congress stand by while China acquires a highly visible presence in the U.S. energy industry?

What can the U.S. do to deal with this budding crisis? Truth be told, there is little the U.S. can do proactively except to prepare for a probable collapse. Sanctions (the typical, know-nothing, public relations move) would be a big mistake. The economic damage would be more than made up for by the political boost given to the Chavistas. The U.S. needs to start building a coalition of support in Latin America to oppose Cuban intervention, support a restoration of democracy and develop a basis for an arms blockade against the failed Chavista government.

The Heritage Foundation and the American Enterprise Institute have offered plenty of advice on how to help out Central America and the Caribbean. Aggressive engagement, innovative programs and political realism would go a long way not only in preparing the U.S. for a Venezuelan collapse, but would benefit these countries in our neighborhood regardless – and, by extension, benefit America.

Of course the Obama administration has neither the time nor the expertise to actually anticipate crises and work on prevention. It’s safe to assume that a Venezuelan collapse will leave the president flat-footed and scrambling again.